Xylem Inc. 2020 Form 10-K Summary
Business context and reporting period
Xylem is a global water technology company serving utility, industrial, commercial and residential customers in approximately 150 countries. Its three reportable segments are Water Infrastructure, Applied Water, and Measurement & Control Solutions. This Form 10-K covers the fiscal year ended December 31, 2020. The filing also reports fourth-quarter 2020 results.
Management identified COVID-19 as the primary operating factor in 2020, affecting customer demand, project timing, site access, production, supply chains and global economic conditions.
Financial performance and key metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Revenue | $4.876 billion | $5.249 billion | Down 7.1% |
| Gross profit | $1.830 billion | $2.046 billion | Down 10.6% |
| Gross margin | 37.5% | 39.0% | Down 150 bps |
| Operating income | $367 million | $486 million | Down 24.5% |
| Operating margin | 7.5% | 9.3% | Down 180 bps |
| Net income attributable to Xylem | $254 million | $401 million | Down 36.7% |
| Diluted EPS | $1.40 | $2.21 | Down 36.7% |
| Net cash from operating activities | $824 million | $839 million | Down $15 million |
| Free cash flow | $641 million | $613 million | Up 5% |
Adjusted operating income was $525 million, with an adjusted operating margin of 10.8%, compared with $727 million and 13.9% in 2019. Adjusted net income was $374 million, or $2.06 per diluted share, versus $547 million, or $3.02 per diluted share, in 2019. Adjusted EBITDA was $795 million, or 16.3% of revenue, compared with $1.023 billion, or 19.5%, in 2019.
| Segment | 2020 revenue | Revenue change | 2020 operating income/(loss) |
|---|---|---|---|
| Water Infrastructure | $2.079 billion | Down 4.5% | $318 million |
| Applied Water | $1.434 billion | Down 6.9% | $205 million |
| Measurement & Control Solutions | $1.363 billion | Down 11.0% | $(106) million |
Orders declined 5.7% to $5.033 billion, while year-end backlog increased 17.9% to $2.124 billion from $1.801 billion. Approximately 55% of the year-end backlog was expected to convert to revenue during 2021.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $1.875 billion at December 31, 2020, compared with $724 million at December 31, 2019.
- Total debt increased to $3.084 billion from $2.316 billion, primarily because of the June 2020 issuance of $1 billion of green senior notes: $500 million due 2028 at 1.950% and $500 million due 2031 at 2.250%.
- Available liquidity was approximately $2.7 billion, consisting of $1.9 billion of cash and $800 million of available credit facilities. The $800 million revolving credit facility was undrawn at year-end.
- The company had $600 million of senior notes maturing in 2021, which management expected to repay from cash. The next long-term debt maturity was in March 2023.
- Capital expenditures were $183 million, down from $226 million. Dividends paid were $188 million, and dividends per share increased to $1.04 from $0.96.
- The company repurchased $61 million of common stock during 2020; $288 million remained available under the authorized repurchase program at year-end. The credit facility amendment restricted repurchases through March 31, 2021, subject to exceptions.
Material changes versus the prior comparable period
- COVID-19 caused organic revenue declines across all segments, with particular weakness in the United States, emerging markets, industrial applications, dewatering, utility projects and site-dependent services.
- Measurement & Control Solutions deteriorated materially, including a decline in adjusted operating income from $130 million to $13 million and a reported operating loss of $106 million.
- Gross and adjusted operating margins contracted because of lower volume, cost inflation, unfavorable mix, increased quality and warranty costs, and strategic investment spending. Productivity and restructuring savings partly offset these pressures.
- Xylem recorded $58 million of goodwill impairment related to the Advanced Infrastructure Analytics reporting unit and $21 million of other asset impairment charges. The AIA unit retained $113 million of goodwill at year-end.
- Restructuring and asset impairment charges totaled $75 million, compared with $63 million in 2019. Management expects $50 million to $60 million of restructuring and realignment costs in 2021.
- Warranty expense increased to $57 million from $25 million, and the year-end warranty accrual increased to $65 million from $41 million.
- The company completed no material acquisitions or divestitures in 2020.
Guidance, outlook, commentary and risks
For 2021, management anticipated total revenue growth of 6% to 8%, including organic revenue growth of 3% to 5%. The outlook assumed gradual market recovery but continued COVID-19 effects. Utilities were expected to grow at a low-to-mid single-digit organic rate; industrial revenue was expected to be flat to up low-single digits; commercial revenue was expected to be flat to down low-single digits; and residential revenue was expected to increase at a low-to-mid single-digit rate.
Management expected approximately $46 million of incremental net savings in 2021 and beyond from 2019 and 2020 actions, while continuing to invest in digital solutions, emerging markets, innovation, services and operational improvement. Capital spending was expected to rise toward more normal levels during 2021.
- Principal risks include the uncertain duration and severity of COVID-19, customer project delays, supply-chain disruption, electronic-component constraints, inflation, tariffs, freight costs and foreign-exchange volatility.
- Additional risks include cybersecurity incidents, product defects and warranty claims, competitive pressures, execution of restructuring initiatives, acquisition integration, goodwill impairment, regulatory and environmental compliance, tax disputes and pension obligations.
- A Swedish tax assessment related to a 2013 European-business reorganization asserted approximately $80 million of tax, penalties and interest. Xylem is appealing and had not recorded unrecognized tax benefits for this matter.
- The company had $378 million of surety bonds, bank guarantees, insurance letters of credit and standby letters of credit outstanding at year-end.
- Xylem expected a material settlement charge primarily comprising unrecognized actuarial losses upon completion of the buyout of its largest U.K. defined benefit pension plan, expected in 2021.
- Environmental liabilities accrued at year-end were $3 million; general legal matters accrued were $6 million. Management did not believe existing legal proceedings would have a material adverse effect, although outcomes cannot be predicted with certainty.
Deloitte & Touche issued an unqualified opinion on the financial statements and concluded that internal control over financial reporting was effective. The critical audit matter was the valuation of goodwill for the Advanced Infrastructure Analytics reporting unit.
Most important facts for investors to verify
- Whether the projected 2021 recovery and 3% to 5% organic growth outlook materialize as COVID-19, project timing and supply-chain pressures evolve.
- Progress in restoring profitability in Measurement & Control Solutions and preventing additional AIA goodwill or intangible-asset impairments.
- Cash funding of the $600 million 2021 debt maturity, leverage covenant compliance and refinancing needs before the 2023 maturity.
- Conversion timing and cancellation risk associated with the $2.124 billion backlog.
- Actual restructuring savings, remaining restructuring expenditures and the effect of continued strategic investment on margins.
- Resolution of the Swedish tax assessment, the U.K. pension-plan buyout and related settlement charge.
- Trends in warranty costs, product quality, cybersecurity, foreign exchange and global supply-chain availability.